A former partner at private equity firm ECI Partners has launched a multimillion-pound case over equity and carried interest that he says he is owed following his departure.

The case centres on the controversial issue of how much private equity partners should benefit from deals after they have left the firm that made them.

Chris Warren, who left London-based mid-market firm ECI at the end of last year to become a partner at Charterhouse Capital Partners, says his equity and carried interest in two of its funds were cut by 95% following his resignation, according to court documents seen by Financial News’ sister title, Private Equity News.

Carried interest is a private equity firm’s cut in investment returns, usually amounting to roughly 20% of profits, which is then distributed among the partners.

Warren’s new firm, Charterhouse, was the focus of a bruising legal battle when former director Geoffrey Arbuthnott said he wasn’t getting his fair share of profits created when he was at the firm.

Arbuthnott lost his case earlier this year – although the legal basis for his claim was different to that of Warren.
Warren says in the court documents that ECI decided that he should be categorised as an “intermediate leaver” – a person who leaves a firm in circumstances that are unsatisfactory or potentially damaging to the partnership or its funds – and should be allowed to keep only 5% of his equity and 5% of his carried interest in the firm’s 2005 and 2008 vintage funds, named ECI 8 and ECI 9.

Warren says that there was no proper basis for categorising him as an intermediate leaver under the partnership agreement, as he lawfully resigned and complied with the terms of the partnership agreements.

He says ECI attempted to prevent him from leaving – and sought to use him as an example to prevent others from leaving – by deploying the intermediate leaver provisions.

A spokesperson for ECI declined to comment on the claims. Warren and a Charterhouse spokesperson also declined to comment.

The filing outlines an estimate of loss and damages that Warren believes he is owed, although it explains that he has yet to seek expert evidence. Warren estimates this would be £3.9 million in December 2013, his 4.24% carried interest in ECI’s ninth fund, of which £3.5 million was vested at the time.

Additionally, he said he had 3.89% carried interest in ECI’s eighth fund, all of which was vested. This is currently estimated to have no value, though this could change depending on the performance of the remaining investments in the portfolio.

Warren also says in the filing that he is entitled to equity in ECI Partners. The filing claims that, depending on the future profitability of the management company, his equity could be worth between £500,000 and £1 million over the next five years.

ECI will file a response to Warren’s claims with the London High Court later in the year, according to a person familiar with the matter.